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Willis, Towers Watson combine forces to face new era

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Willis Group Holdings P.L.C. and Towers Watson & Co. are betting that a merger of near-equals will set up a broker consultant entity that's greater than the sum of its parts.

The combination of Willis' distribution system and Towers Watson's initiatives, including its private health insurance exchange, will benefit both parties and present significant growth opportunities for both, observers say.

Under the proposed $18 billion transaction, shareholders of London-based brokerage Willis will own about 50.1% of the combined company that is to be called Willis Towers Watson, while shareholders of New York-based risk management and human resources consultant Towers Watson will hold about 49.9%.

The deal includes Towers Watson shareholders receiving 2.649 Willis shares for every Towers Watson share. Towers Watson shareholders also would receive a “one-time cash dividend of $4.87 per Towers Watson share preclosing,” the companies said in a statement.

Both boards have agreed on the merger. The combined company will have about 39,000 employees in 120 countries and pro forma 2014 revenue of about $8.2 billion, the companies said in the statement.

The merger is expected to result in cost savings of about $100 million to $125 million within three years of the deal closing, which Willis and Towers Watson said is expected Dec. 31.

James McCann, Willis' nonexecutive chairman, will become chairman of the combined company; John Haley, currently chairman and CEO of Towers Watson, will become CEO of the combined firm; and Dominic Casserley, CEO of Willis, will become president and deputy CEO.

There are “numerous ways” the merger will help Towers Watson's business to grow, Mr. Haley said during a conference call last week. “We are very excited about Willis' distribution, which will enable us to enhance our middle-market (private health insurance) exchange” capabilities, Mr. Haley said.

He said Towers Watson expects significant growth in this segment over the next five to seven years and believes that the merger would allow Towers Watson to achieve its ambition of a 25% market share of that business.

“Willis brokers can definitely accelerate sales via the exchange” with the merger, Mr. Casserley said during the call.

Willis and Towers Watson already had a relationship around Towers Watson's health care insurance exchange, the OneExchange platform, and conversations “broadened from that relationship,” Mr. Casserley said.

“We are determined to develop an integrated company without any divisions or silos,” he said.

Discussions about the merger began in April, Mr. Haley said.

“We are delighted by this merger because it re-establishes synergies with someone who is very strong in the reinsurance (brokerage) business,” Mr. Haley said. Towers Watson divested its reinsurance brokerage business to Jardine Lloyd Thompson Group P.L.C. in 2013 because, among other reasons, it felt it could not compete with rivals with larger reinsurance brokerage operations.

Investors, however, were less enthusiastic. Towers Watson's stock price fell almost 9% on June 30, but rebounded somewhat the following day.

“It was viewed as better for Willis than Towers Watson shareholders, and that's why the stock price blipped the way it did,” said John L. Ward, CEO of Cincinnatus Partners L.L.C. in Loveland, Ohio.

The proposed merger, however, received a generally positive analyst response.

“The transaction appears to be almost a true merger of equals,” J. Paul Newsome, managing director at Sandler O'Neill & Partners L.P. in Chicago, said in a research note.

“From our perspective, the strategic justification appears to be about the benefits of being a global insurance broker,” he wrote. “Both companies were already among the largest brokers in the world, but not as global” as Marsh L.L.C. and Aon P.L.C., the world's two largest brokers.

Mr. Newsome said the combination could create new competition for Arthur J. Gallagher & Co. and other brokers competing in the middle market.

“If Willis emerges as a better-run company, (then) maybe the main impact for Gallagher and others is that there is just one more good competitor,” Mr. Newsome said in an email. “I am constantly reminding investors that the insurance broking business is a really big global market, and that just because there are two, three or four really big global insurance brokers doesn't mean that there isn't plenty of room for a fifth or sixth global giant. This is particularly true if you allow the insurance brokers smaller than Aon and Marsh to focus on the middle-sized corporations.”

“The deal provides several well-respected consulting business segments, including a premier health insurance exchange, employee benefits brokerage, risk and financial services consulting, and talent and rewards consulting” that largely mirror Marsh's and Aon's corporate structure, Meyer Shields, managing director at Keefe Bruyette & Woods Inc. in Baltimore, said in a research note.

The merger also “implies significant cross-sell opportunities,” by giving Willis access to Towers Watson's large U.S. corporate clients and giving Towers Watson access to Willis' midsize clients across the globe, Mr. Shields said.

“At first blush, the combined entity appears to offer impressive services for their corporate clients, which we expect to lead to stronger client retention rates and potentially higher growth rates,” Cliff Gallant, an analyst at Nomura Securities International Inc. in San Francisco, said in a research note.

Not all analysts were as impressed, however.

“We view this as a defensive move by both companies,” said Eamonn Flanagan, head of Shore Capital Ltd.'s Liverpool, England, office. “To us, Willis appears to be struggling to deliver on its own cost savings plans without damaging its own franchise and is losing key personnel. Towers Watson appears to be highly rated … on the basis of its health care exchanges, where we await the real revenue delivery.”